Endless Parade of Ineffective European Agreements Continues

The Eurogroup noted that the outlook for the sustainability of Greek government debt has worsened compared to March 2012 when the second programme was concluded, mainly on account of a deteriorated macro-economic situation and delays in programme implementation

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Against this background and after having been reassured of the authorities' resolve to carry the fiscal and structural reform momentum forward and with a positive outcome of the possible debt buy-back operation, the euro area Member States would be prepared to consider the following initiatives:

• A lowering by 100 bps of the interest rate charged to Greece on the loans provided in the context of the Greek Loan Facility. Member States under a full financial assistance programme are not required to participate in the lowering of the GLF interest rates for the period in which they receive themselves financial assistance.

• A lowering by 10 bps of the guarantee fee costs paid by Greece on the EFSF loans.

• An extension of the maturities of the bilateral and EFSF loans by 15 years and a deferral of interest payments of Greece on EFSF loans by 10 years. These measures will not affect the creditworthiness of EFSF, which is fully backed by the guarantees from Member States.

• A commitment by Member States to pass on to Greece's segregated account, an amount equivalent to the income on the SMP portfolio accruing to their national central bank as from budget year 2013. Member States under a full financial assistance programme are not required to participate in this scheme for the period in which they receive themselves financial assistance.The Eurogroup stresses, however, that the above-mentioned benefits of initiatives by euro area Member States would accrue to Greece in a phased manner and conditional upon a strong implementation by the country of the agreed reform measures in the programme period as well as in the post-programme surveillance period.

While I fully expect the market and economic blogosphere to cheer this new agreement, I remain convinced that this deal will be as equally unsuccessful as the previous three (not including the many failed agreements for other countries). From my perspective it is not surprising that Greece’s economic situation has worsened during the past year. What is surprising is the Eurogroup’s ability to commend Greece’s efforts and push to strengthen those previous efforts that have resulted in an increasingly unsustainable economic and political environment.This agreement, once again, does not actually reduce sovereign debt outstanding but, instead, reduces the interest rate and extends the maturity of previous loans. Although this eases the debt burden ever so slightly, the conditionality of further structural adjustment practically ensures the economy will continue to dramatically underperform. This declining growth will continue to offset attempts to reduce the budget deficit or debt-to-GDP ratio. Considering the lofty expectations for Greece’s economy and budget that accompany this agreement, I feel confident in predicting that a future agreement will read:

The Eurogroup noted that the outlook for the sustainability of Greek government debt has worsened compared to November 2012 when the fourth programme was enacted, mainly on account of a deteriorated macro-economic situation.

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